[15PacRimLPolyJ0233] Australian Insolvency Law and the 1992 ISDA Master Agreement - Catalyst, Reaction, and Solution

Abstract:

Abstract: The reverberations of Enron’s financial collapse were heard on an
international scale. Indeed, Enron Australia’s liquidation set off a flood of concern and
speculation about the International Swaps and Derivatives Association’s (“ISDA”) model
documentation for derivative transactions. A December 2003 opinion of the Supreme
Court of New South Wales exposed a flaw in the ISDA 1992 Master Agreement. Two
provisions of the agreement operate in tandem, creating a result which operates contrary
to the clear meaning of the terms. This volatile interaction of the provisions effectively
shifts the risk from the parties to the swap contract to the creditors of the defaulting party.
This unexpected result poses a real concern for the creditors of parties to swap or
derivative instruments governed by the 1992 Master Agreement. The ISDA has
articulated policy goals to maintain market stability and efficiency. As the drafter of the
model agreements, the ISDA has an ethical obligation to ensure that the terms of the
agreement operate according to their clear meaning. Otherwise, the parties can best
address the Agreement’s deficiencies by taking notice and contracting around them.